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South Orange County Wastewater Authority
It Should Continue to Improve Its Accounting of Member Agencies’ Funds and Determine Whether Members Are Responsible for Its Unfunded Liabilities

Report Number: 2017-113

March 22, 2018 2017-113

The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the financial management practices and governance structure of the South Orange County Wastewater Authority (SOCWA).

This report concludes that until recently, SOCWA did not adequately account for cash it collected from its member agencies, resulting in a $354,000 discrepancy in the amount of cash collected but not yet spent between its audited financial statements and its accounting records. SOCWA is still investigating this discrepancy and plans to present the final results to its board of directors for resolution. In addition to the concerns regarding its accounting practices, we determined that SOCWA’s joint powers authority (JPA) agreement does not expressly hold its members liable for unfunded obligations for employee retirement benefits. As of fiscal year 2016–17 SOCWA’s unfunded obligations for retirement benefits totaled $18 million, and if it were to dissolve and did not have sufficient assets to pay those obligations it is unclear whether the plan beneficiaries would have their retirement benefits reduced.

Also, from its formation in 2001 through fiscal year 2015–16, SOCWA has had financial reporting issues such as understating the value of certain assets and failing to file audited financial statements when required. In addition, SOCWA has been slow to correct deficiencies in internal controls identified by external auditors during their audits of SOCWA’s financial statements for fiscal years 2012–13 through 2015–16. Finally, elements of SOCWA’s governance structure are generally similar to that of other wastewater and water JPAs in California.

Respectfully submitted,

State Auditor

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